Whammies Piling Up

by Mark Scaramella, December 3, 2008

Former Mendocino County Promotional Alliance chief executive Director John Dickerson first presented his alarming analysis of the County's total debt load a few months ago. Using Mendocino County and California state records, Dickerson pointed out that in 1993 the County's total debt was a relatively manageable $60 million; by 2002 it had risen to a still manageable $83 million.

In those relatively unencumbered days Mendo had a top-level AAA credit rating.

By 2007 the County's debt had risen dramatically to $315 million and continues to climb, soar actually, and Mendocino County's credit rating is down to A-, which, for all you perennial C students is the fiscal equivalent of D, not an A with a slight limp.

Dickerson also points out that according to the State Controller's Office, Mendocino's independent retirement fund is the worst performing of all the 20 independent county retirement funds in the state through 2005, the last year for which data is available. (The rest of the counties are part of CalPERS, the state's still more-or-less solvent employee pension fund.)

Dickerson's main complaint seems to be that for much of this century while County revenues were going up along with the stock market and assessed property values, the County failed to pay down its debt, preferring instead to hire more staff and grant employee pay raises, including wholly insupportable raises for the supervisors themselves.

In late October, soon after Mr. Dickerson posted his debt estimates on his website (YourPublicMoney.com), County CEO Tom Mitchell told the Board of Supervisors, "There are inaccuracies on that website. A response is being drafted. The issue needs deeper research. We have made tough decisions in the past. It is not an all-inclusive website on our debt. Our response will clarify, not attack or take issue. His numbers are distorted by how he examines the figures."

Needless to say, nothing has been forthcoming from Mr. Mitchell, nor have the Supervisors asked about the status of Mitchell's response. Mr. Mitchell is presumably still looking into it.

Late in 2006, the Mendocino County Grand Jury reported, "County financial officials have estimated that the total debt for retirement has peaked and should soon show a steady reduction. Their estimate is that, when the current Pension Obligation Bond is fully paid in 2026, the Retirement Association funding level will be at what the County believes to be a fiscally responsible level."

Everything will be fine by 2026!

(Note: Last time anyone peeked at the County's total debt it had not "peaked." In fact, it's still peaking.)

The Board of Supervisors responded to this Grand Jury "finding" with: "The Board of Supervisors agrees with this finding."

That was in 2006 when the Dow Jones was approaching its historical high of more than 13,000. It has since fallen into the low 8,000s and is likely to go much lower before it finally bottoms out.

During the recent Supervisorial campaign candidate John McCowen declared on his website, "The County is saddled with a long term debt of about $135 million and has unfunded liabilities for retiree pensions and health care of about $165 million, a figure that has almost certainly gone up as our nation's financial situation deteriorates. The County issued Pension Obligation Bonds in 1996 and again in 2002. Only six years later the County is again faced with huge unfunded liabilities. John Dickerson, who has devoted countless hours to understanding local government budgets, and who is currently shining a light on long term county debt and unfunded liabilities, has endorsed me because he believes I am best qualified to understand these complex issues and make informed decisions as the County struggles to regain control of its debt structure."

Dickerson endorsed McCowen for Supervisor. So did the County Employees' Union. Dickerson and the Employer's Council favor putting more money into paying off the ballooning debt, laying off employees, and cutting County employee benefits — with newly re-hired former Mendo CAO Jim Andersen as hatchet man. (Andersen is fresh off engineering a round of benefit cuts in Sonoma County.)

Having been confirmed as Supervisor Elect for the First District (Ukiah), the public will soon get a solid opportunity to see what kind of "informed decisions" Mr. McCowen will make.

The question is, who will be doing the informing? Dickerson or the Employees Union? Given McCowen's background, we're betting on Dickerson — although McCowen will probably tell the union that he has no choice but to make drastic cuts.

According to the County's "independent" audit of 2000, the County's expenses were about $120 million. Debt service in recent years has been up and down, sometimes several million, sometimes less than a million. Paying down debt seems to happen after everybody else dips generously into the budget bucket.

By 2003 the County's annual outlays had ballooned to $183.5 million. And in 2007 it was up to about $219 million, almost double in the seven years between 2000 and 2007.

The main reason for the dramatic rise is fairly obvious: staffing increases combined with government employee salary and benefit increases for both line and management persons. Average salaries (around $45k/employee) have gone up as have average benefits (around $25k/employee), but, for below average line employees, healthcare cost increases have nearly nullified their pay raises.

Staffing increases in the "helping agencies" has been in federal and state funded positions which don't increase "net county cost." As a result, these increases are regularly rubberstamped by the Board of Supervisors month after month, year after year. Trouble is, they produce a greatly increased local pension liability, as more and more employees retire at a significant portion of their annual salary. The feds and the state don't pay the pensions.

And it's that ballooning pension liability that makes up most — over 80% — of Mr. Dickerson's $315 million characterization of County debt as "crushing."

According to the County's independent retirement system board, now headed by Mendo's former CAO Jim Andersen at $175k/year plus generous bennies, Mendo's retirement system stock portfolio lost about 30% of its value in the last few months as the stock market tanked. This huge loss of value also means less revenue (earnings) coming into the retirement system. And it was that "surplus" revenue that was funding retiree healthcare for employees who retired prior to 1997.

Short of outright bankruptcy, Mendo is statutorily required to pay pensions. But it's not legally required to pay for retiree healthcare, the cost of which is itself going up dramatically.

Local financial gadfly John Sacowicz said recently that Mendo's financial mucky-mucks should have seen this giant debt mess coming at least three years ago when the first signs of the housing bubble bursting were visible.

For decades now, the retirement board has been basing their investments on the advice of long-time financial advisor Peter Chan, who uses an investment model that Sacowicz says is 30 years old and out of date.

At the November 19 meeting of the County's Retirement System board, Andersen told his trustees that their stock and bond portfolio had lost 30% over last 12 months, a "paper loss" of $34.5 million for October and that the system was "below index on our bonds."

Mendo's top bond holding — as high as 90% of their bonds — was with a bond fund called Dodge & Cox which, until recently, was a top yielding fund. But Dodge & Cox has suffered a large loss in value in recent months because it had major holdings high risk derivatives and credit default swaps as well as in Lehman Brothers and Wachovia, both of which went bankrupt last fall.

The retirement system board is now considering moving some of their Dodge & Cox bond holdings to another big bond fund house, Pimco, over the next few months, hoping that somehow Pimco can pick and choose from the Dodge & Cox holdings to minimize losses. This tinkering sounds like it won't be as simple as the retirement board assumes.

Dickerson and Sacowicz both say that it's looking more and more like the retirement system will either raise healthcare premiums to retirees again, cut healthcare benefits, or perhaps even drop healthcare coverage for retirees entirely. "Andersen told us what he's going to do," declared Sacowicz recently, "cut healthcare benefits to the bone if not eliminate them and float another bond for the statutory requirements."

However, Sacowicz insists that the County's credit rating is going to make floating another bond (i.e., borrowing money) very difficult. "It doesn't seem like they can float another $100 million bond. We're a junk bond county now and we will not be able to raise the money without an unreasonable interest rate."

Technically, an A- rating isn't "junk," but it's not very good either. So borrowing will cost more.

Retirement Administrator Andersen blames all the retirement system's problems on "a breakdown in fundamentals" in the stock market. (Readers may recall that when Andersen presented his last County budget as CAO back in 2002 he blamed the County's problems on 9/11. Like the rest of County officialdom, Andersen places blame as far away from himself as possible.)

Andersen suggested that the best thing for the retirement system to do is "hold fast until you start to see the funds coming to bear again," adding, "We have seen losses across all categories which can result in significant unfunded liability."

"Can"? How about has?

Andersen hopes that the current year's market drop is "extraordinary" and that the market will recover and everything will average out. "This is not to ignore losses," Andersen said as he ignored the losses. "We recognize the potential impact of fund rates."

During public comment at the end of the November 19 retirement board meeting Sacowicz politely asked what the total cost of managing the independent retirement system was (including Mr. Chan plus all the individual fund management fees), and suggested that the Board require bidders for the next financial consulting contract disclose their top 50 holdings so the public can judge the bidders' soundness along with the Board.

A totally oblivious retirement board co-chair (and County Jail Commander) Lieutenant Tim Pierce blandly responded, "Moving on to Item 6c..."

Let's count the County's snowballing financial whammies: staffing is up, salaries are up, pensions are up, healthcare costs are up, the County's credit rating is down (meaning the cost of borrowing money is up), and the state's budget deficit is way up and growing.

Is there a plus side? Maybe. More and more of official Mendo thinks there's a lot of property in the Mendo hinterlands that is not on the County Assessor's books. Maybe 30% more. Tax it and whoopee! more County income. But that perhaps mythical windfall won't produce any real revenue for the County for at least two years, and given the County's glacial approach to doing anything, the money may not arrive for years in whatever amount.

A few people think that the only way Mendo can get out of this mess is to figure out a way to tax pot. Or sell it. But don't hold your breath — and definitely don't inhale.

No matter how our various helpless executive bystanders calculate the debt, Dodge, Cox, Andersen, Mitchell, Bozo & Co. don't inspire confidence.

PS. Back in June, a few months after the retirement board was made an independent entity, no longer a subcommittee of the Board of Supervisors, Jim Andersen's position of "retirement administrator" was created with a budget of $187,500. According to the agenda item proposing that position's creation: "Due to the Retirement Division separating from Treasurer-Tax Collector, the Treasurer-Tax Collector no longer serves as administrator of Mendocino County Employee's Retirement Association (MCERA). It has been requested that a classification of Retirement Administrator be adopted and a position allocated. The Administrator will oversee the operations of MCERA including fund management, financial services and operations of the Retirement department. Please note that the salary was established by the Retirement System and is not part of the County's salary grade protocol. The cost of this position is covered entirely by the Retirement System."

Translation: Nearly $200k per year is being taken out of the employee pension fund for no apparent reason.

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